UK says “living wills” to drive bank restructurings
Financial Services Minister Paul Myners said banks will have to have an in-house “undertaker” responsible for mapping out “pre-structured euthanasia” or how it would be wound down if collapse loomed.
He also slammed “footballer” pay, saying a better balance is needed between individual pay in banking and broader society, where salaries are far lower.
Britain will put forward a draft law in the autumn to give the Financial Services Authority powers to force banks to draw up living wills so that the broader financial system is not destabilised when a bank fails, Myners said.
“If a business is too complex to produce a living will then it’s almost certainly too complex to manage and represents an unacceptable regulatory risk,” Myners told a Financial Times conference.
Britain wants to avoid having to nationalise or take stakes in several banks again, as it did with Northern Rock, Bradford & Bingley, RBS and Lloyds at huge cost to taxpayers.
“Some of our banks will have to go through quite significant restructuring in the next few years,” Myners added. “We are not knocking the City and we don’t have targets on the size of the financial sector. We are not being unpatriotic but things must change.”
Banks needed to fill an “accountability gap” and not dictate the direction of the economy. “Behaviours judged as reckless and self-serving on the High Street must not be rationalised as acceptable on trading floors,” Myners said.
“We need to do more and we must act now. Firms that are systemic should be supervised and regulated more intensively. This will mean higher capital requirements and tougher standards of liquidity than for smaller firms,” he added.
He dismissed critics who say devising living wills will be expensive, saying the cost would “pale in comparison” with the taxpayers’ cash that was needed to bail out banks.
Legal experts say living wills would require untangling
complex structures set up to exploit tax and regulatory advantages in different countries.
The G20 summit in the United States next week is set to reinforce the need for banks to be able to wind down quickly, and avoid the broader panic seen with the demise of Lehman Brothers a year ago as other banks worried about their exposures.
Bankers are pocketing bonuses of up to 10 million pounds, and up to 60 percent of gross fees from merger and acquisition transactions when most deals represent poor value over time, Myners said.
It was time for banks to justify to the public the ever-growing remuneration enjoyed by derivatives traders and “other inhabitants of the casino end” of banking, he added.
Next week’s G20 summit is also set to adopt curbs on a bank’s bonus pool if it is failing to meet new higher levels of capital requirements. EU leaders agreed on this strategy at a pre-G20 summit on Thursday evening.
“The challenge to put to banks is they should not approve new products or engage in complex strategy without the fullest understanding of risk … and economic purpose of the underlying instrument or transaction,” Myners said.
Banks were allowing a disproportionate share of their surplus cash to pass to traders, leaving shareholders shortchanged, although the latter have a key role in reining in excessive behaviour, Myners said.
“Do they have unique talents or rely on the bank’s franchise? Derivatives traders and others are not footballers and should not be paid as if they are,” Myners said.
Higher capital requirements “by multiples” will limit the bonus pool for risky transactions, he added.